Analysts at Arif Habib Limited are forecasting a 200 basis points (bps) reduction in the benchmark policy rate in the upcoming monetary policy meeting (MPC) set for December 16, 2024. This would mark the last policy announcement of the year by the State Bank of Pakistan (SBP). If this anticipated cut occurs, it would bring the policy rate to 13%, a level not seen since July 2022, when the rate was at 13.75%.
The proposed cut would represent a significant shift, as it would bring the total reduction for the calendar year 2024 to an impressive 900 basis points. This would be the fifth consecutive rate cut since the reversal of interest rates began in June 2024, reflecting the country’s improving macroeconomic conditions.
Several key macroeconomic indicators support the analysts’ projection for a 200bps rate reduction. The most notable factor is the dramatic decline in inflation, which dropped to 4.9% in November 2024, the lowest in 79 months. Analysts expect inflation to maintain this level in December 2024, providing further backing for the rate cut.
Additionally, Pakistan’s current account balance has shown a marked improvement, shifting to a surplus of USD 349 million for the first four months of FY25, compared to a deficit of USD 1,528 million during the same period last year. This positive shift is largely attributed to a 35% year-on-year (YoY) surge in remittances, which reached USD 11.9 billion during this period, offering significant support to the country’s external position.
Another factor driving expectations for the rate cut is the potential benefit for the industrial sector. A lower policy rate would reduce production costs, encouraging demand revival. This is especially important as demand has been stifled by high costs, contributing to a 0.8% YoY decline in large-scale manufacturing (LSM) growth in the first quarter of FY25.
Moreover, the SBP’s foreign reserves have risen to USD 12 billion in November 2024, up from USD 9.4 billion in June 2024. This increase is partly due to the IMF’s disbursement of the first tranche of USD 1 billion from the 37-month Extended Fund Facility (EFF) and inflows from financial institutions such as the Asian Development Bank (ADB). This boost in reserves gives the SBP the flexibility to cut interest rates without destabilizing the currency, as evidenced by a 0.14% appreciation of the currency year-to-date.
These positive macroeconomic developments provide strong support for the expectation of a 200bps cut in the benchmark policy rate, aiming to foster economic growth and stability.
